The Honorable Ned LamontGovernor of the State of ConnecticutState
CapitolHartford, Connecticut

Dear Governor Lamont:

I write to provide you with financial statements for the General Fund and the
Transportation Fund through February 29, 2020. At the outset of this letter, I
wanted to thank you for your leadership and dedication to the people of
Connecticut during the COVID-19 crisis. The Office of the State
Comptroller stands with you and will continue to provide any support needed to
strengthen the State’s efforts in these challenging times.

The Office of Policy and Management (OPM) is projecting that the General Fund
will end Fiscal Year 2020 with a deficit of $58.6 million, an increase of $3.8
million from last month’s estimate. OPM noted this forecast incorporated $37.4
million in anticipated expenditures announced to date for the state’s response
to the public health emergency to combat the COVID-19 pandemic. However,
the deficit projection did not include the broader recessionary influences on
the state’s economic activity and revenue streams.

OPM is projecting that the Special Transportation Fund (STF) will end Fiscal
Year 2020 operations with a $39.3 million deficit, representing a $40.5 million
reduction in the fund’s operating balance from last month. Overall net revenues
were reduced by $46.4 million, largely due to lower oil prices and reduced
commuter travel. The largest change was a $31 million reduction in Oil Companies
Tax revenue. At the same time, spending forecasts improved by a net $5.9
million. The current projection would leave a positive STF balance of
$280.9 million at year-end. My office is in general agreement with OPM’s
Transportation Fund projection.

The following analysis of the financial statements furnished by OPM is
provided pursuant to Connecticut General Statutes (CGS) Section 3-115.

The Office of the State Comptroller (OSC) is currently projecting a General
Fund deficit of $170.0 million for FY 2020, $111.4 million higher than OPM’s
current estimate. OSC’s forecast incorporates most of the revenue changes
adopted by OPM in its March 20th letter, with two exceptions. First, OSC
is reducing its estimate for the withholding portion of the income tax by $130
million, which is $100 million lower than OPM’s most recent forecast. My
office is already seeing a drop-off in withholding receipts from the large
number of layoffs and furloughs resulting from non-essential business closures
related to the state’s response to the COVID-19 pandemic. In addition, OSC is
reducing its sales tax estimate by $30 million, $11.4 million below OPM’s
projection, again due to coronavirus-related business closures and shelter at
home directives.

Aggressive public health interventions and social distancing measures are
necessary to fight the further spread of COVID-19. Yet the speed and scale
of the pandemic’s economic disruptions are unprecedented for Connecticut. As a
result, the full extent of the impact is not yet clear and may take weeks, if
not months, to determine. The current year deficit could, and likely will,
grow larger. The delays and extensions of tax filing deadlines that became
necessary during the crisis will further complicate any analysis in the near
term. Nevertheless, OSC will continue to monitor the situation closely and
update these projections in future reports.

On the expenditure side of the budget, my office is largely in agreement with
OPM. However, the state’s response to the public health aspects of the
coronavirus is an evolving situation. Therefore, expenditure projections
will be revised as more information becomes available.

The statutory revenue volatility cap requires receipts above a certain
threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2020,
the cap is $3,294.2 million for estimated and final income tax payments and
revenue from the Pass-through Entity (PET) tax. If current projections are
realized, a $318.3 million volatility transfer would be made to the BRF.
Due to recent economic disruptions, stock market losses and extensions of
various tax filing deadlines, this projection will need to be revisited as the
fiscal year progresses.

The balance of the BRF presently stands at $2,505,537,507. Adding the
estimated $318.3 million volatility transfer, less the projected FY 2020 deficit
of $170.0 million would bring the year-end balance of the BRF to approximately
$2.65 billion. This would represent 13.3 percent of net General Fund
appropriations for FY 2021. The state has made enormous progress in
building the BRF balance over the past two years. That effort required
sacrifice and discipline. Now, as the state faces an unexpected public
health and economic crisis, Connecticut is better positioned to meet the
challenge.

To date three Federal emergency spending bills have been enacted by Congress
that will provide financial resources to Connecticut to combat the coronavirus
and the associated economic damage. This includes the $2.2 trillion
Coronavirus Aid, Relief, and Economic Security (CARE) Act, signed by the
President on March 27th. According to a Federal Funds Information for States
(FFIS) analysis, Connecticut is projected to receive $2.36 billion in funds from
the CARE Act and the two earlier Federal bills. As millions of Americans and
thousands of Connecticut residents lose their jobs in the economic fallout of
the COVID-19 pandemic, sustained support will be needed, including:

· Expanded unemployment insurance;

· Support for businesses, especially
small and medium sized businesses, to maintain jobs and keep employees on the
payroll;

· Increased aid for state and local
governments, as well as for hospitals, other health care providers and first
responders to deal with the ongoing public health crisis.

The scope and suddenness of this crisis is without precedent in living
memory. Therefore, relief needs to be provided quickly and be sustained
over time to prevent even more harm, especially for those most in need.
The recovery will be difficult and uneven. The biggest risk for policy
makers is not doing too much, but rather doing too little in the face of these
enormous challenges.

Connecticut’s budget results are ultimately dependent upon the performance of
the national and state economies. Virtually all economic measures look
back at past periods. In the present situation, therefore, some economic
indicators presented below may appear inconsistent with more recent developments
in the rapidly changing response to the COVID-19 pandemic.

In recent weeks, Connecticut and the nation saw a historic spike in initial
unemployment insurance (UI) claims as coronavirus concerns forced numerous
businesses to close in support of public health-related social distancing
efforts. According to the U.S. Bureau of Labor Statistics (BLS) initial UI
claims for Connecticut went from 3,440 to 25,098 for the week ending March 21st,
an increase of 630 percent. Since that date, jobless claims continued to
surge as more claims poured into the Connecticut Department of Labor (DOL) on a
daily basis.

Prior to the COVID layoffs, the state was experiencing modest, but steady job
growth. On March 23rd, Connecticut DOL reported the preliminary
Connecticut nonfarm job estimates for February 2020 from the business payroll
survey administered by the U.S. Bureau of Labor Statistics (BLS). DOL’s
Labor Situation report showed the state gained 4,000 net jobs in February, to a
level of 1,700,800 seasonally adjusted. The January 2020 originally
released job gain of 2,600 was revised up to a gain of 3,300 over the month.
According to DOL, Connecticut experienced six months of job growth through
February. Having said that, payroll jobs are expected to decline sharply
in March as a result of increased layoffs and furloughs.

Over the year, DOL reported that nonagricultural employment in the state grew
by 13,300 (0.8 percent) seasonally adjusted. Connecticut's unemployment rate
stood at 3.8 percent in February, up one-tenth of a percent from the revised
January level and unchanged from a year ago. The U.S. jobless rate in
February 2020 was 3.5 percent, down three-tenths from February 2019. As
indicated earlier, due to the dramatic increase in initial unemployment claims
in March, the state and national unemployment rates will be significantly higher
when the official estimates are released next month.

On March 24th, the Bureau of Economic Analysis reported that Connecticut’s
personal income grew by a 1.8 percent annual rate between the third and fourth
quarters of 2019. Based on this result, Connecticut ranked 46th in the
nation for fourth quarter income growth. This growth rate was below the
national average of 3.0 percent and the New England region’s average growth rate
of 2.8 percent.

For the full year in 2019, BEA reported, income rose 3.2 percent in
Connecticut, lower than the national growth rate of 4.4. percent and ranked 48th
in the nation overall. Despite the slower level of growth, Connecticut
still ranked first in the nation for per capita personal income at $79,087.
This represented 140 percent of the national average of $56,663.

Prior to any COVID-related closures, Berkshire Hathaway HomeServices reported
results for the Connecticut housing market for February 2020 compared with
February 2019. Sales of single-family homes grew by a modest 1.18 percent,
with the median sale price increasing by 8.70 percent. New listings were
up 7.94 percent in Connecticut, while the median list price rose 6.25 percent to
$254,900. Average days on the market were unchanged in February 2020 compared to
the same month in the previous year (93 days on average).

For the U.S. housing market, the National Association of Realtors (NAR)
reported existing-home sales climbed substantially in February following a
slight decline in January. February sales increased 6.5 percent over
January to a seasonally adjusted annual rate of 5.77 million. Of the four major
regions, only the Northeast reported a decrease in sales, while other areas saw
increases, including sizable sales gains in the West. According to NAR,
the median existing-home price for all housing types in February was $270,100,
up 8.0 percent from February 2029 ($250,100), as prices increased in every
region. February’s price increase marks 96 straight months of
year-over-year gains. NAR reported that the positive results in February
are not reflective of the impact of the coronavirus. The associated
disruptions to the economy and the stock market will make it difficult to
predict what short-term effects the pandemic will have on future sales.

My office also issues a Comprehensive Annual Financial Report (CAFR) as an
accounting supplement to the budgetary report. The CAFR includes financial
statements for all state funds and component units prepared in accordance with
Generally Accepted Accounting Principles (GAAP). From a balance sheet
perspective, the GAAP unassigned fund balance in the General Fund was a negative
$771.4 million as of June 30, 2019.

If you have any questions on this report, please do not hesitate to contact
me.